[House Report 107-765]
[From the U.S. Government Publishing Office]



107th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     107-765
_______________________________________________________________________

                                     

                                     

                                     

                                                 Union Calendar No. 480

   THE FEDERAL GOVERNMENT'S CONTINUING EFFORTS TO IMPROVE FINANCIAL 
                               MANAGEMENT

                               __________

                             FOURTH REPORT

                                 by the

                     COMMITTEE ON GOVERNMENT REFORM


                                     


                                     

  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform

October 24, 2002.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida         EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California             PATSY T. MINK, Hawaii
JOHN L. MICA, Florida                CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia            ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
BOB BARR, Georgia                    DENNIS J. KUCINICH, Ohio
DAN MILLER, Florida                  ROD R. BLAGOJEVICH, Illinois
DOUG OSE, California                 DANNY K. DAVIS, Illinois
RON LEWIS, Kentucky                  JOHN F. TIERNEY, Massachusetts
JO ANN DAVIS, Virginia               JIM TURNER, Texas
TODD RUSSELL PLATTS, Pennsylvania    THOMAS H. ALLEN, Maine
DAVE WELDON, Florida                 JANICE D. SCHAKOWSKY, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida              DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho          STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia                      ------
JOHN J. DUNCAN, Jr., Tennessee       BERNARD SANDERS, Vermont 
JOHN SULLIVAN, Oklahoma                  (Independent)


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                     James C. Wilson, Chief Counsel
                     Robert A. Briggs, Chief Clerk
                 Phil Schiliro, Minority Staff Director

    Subcommittee on Government Efficiency, Financial Management and 
                      Intergovernmental Relations

                   STEPHEN HORN, California, Chairman
RON LEWIS, Kentucky                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                 MAJOR R. OWENS, New York
ADAM H. PUTNAM, Florida              PAUL E. KANJORSKI, Pennsylvania
JOHN SULLIVAN, Oklahoma              CAROLYN B. MALONEY, New York

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
                    Bonnie L. Heald, Staff Director
                     Henry A. Wray, Senior Counsel
               Rosa R. Harris, Professional Staff Member
                          Chris Barkley, Clerk
           David McMillen, Minority Professional Staff Member
  


                         LETTER OF TRANSMITTAL

                              ----------                              

                                  House of Representatives,
                                  Washington, DC, October 24, 2002.
Hon. J. Dennis Hastert,
Speaker of the House of Representatives,
Washington, DC.
    Dear Mr. Speaker: By direction of the Committee on 
Government Reform, I submit herewith the committee's fourth 
report to the 107th Congress. The committee's report is based 
on a study conducted by its Subcommittee on Government 
Efficiency, Financial Management and Intergovernmental 
Relations.
                                                Dan Burton,
                                                          Chairman.

                                 (iii)

                                     


                               C O N T E N T S

                                                                   Page
  I. Overview.........................................................1
 II. Introduction.....................................................4
III. Findings and Conclusions.........................................5
      A. The Federal Government suffers from pervasive financial      5
          management problems.
      B. A good statutory framework for financial management          6
          exists, but implementation has been slow and uneven.
      C. Fiscal year 2001 financial statement audits show mixed       9
          results.
      D. The subcommittee's financial management report card         11
          shows lower grades this year.
      E. Additional financial management oversight hearings......    15
      F. The administration is taking the lead on financial          19
          management improvement.
 IV. Recommendations.................................................20

                               Appendixes

Appendix A.--Major Federal Financial Management Legislation......    23
Appendix B.--Basis for Agency Financial Management Grades........    28
Appendix C.--Index of Witnesses..................................    31

                                  (v)

  
                                                 Union Calendar No. 480
107th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     107-765

======================================================================

 
   THE FEDERAL GOVERNMENT'S CONTINUING EFFORTS TO IMPROVE FINANCIAL 
                               MANAGEMENT

                                _______
                                

October 24, 2002.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

   Mr. Burton, from the Committee on Government Reform submitted the 
                               following

                             FOURTH REPORT

    On October 9, 2002, the Committee on Government Reform 
approved and adopted a report entitled ``The Federal 
Government's Continuing Efforts to Improve Financial 
Management.'' The chairman was directed to transmit a copy to 
the Speaker of the House.

                              I. Overview

    The Federal Government faces pervasive financial management 
weaknesses that have persisted for decades. The Government as a 
whole and some of its largest individual agencies cannot 
balance their books. Few agencies have the financial systems 
they need to produce timely and reliable data for day-to-day 
management of their operations. Even fewer agencies can use 
their financial systems to monitor and make informed decisions 
about the performance of their programs. Most agencies cannot 
determine the full costs of their programs much less evaluate 
their cost-effectiveness.
    Not surprisingly, these financial management weaknesses 
exact a heavy toll on the Government and its citizens. 
Countless billions of taxpayer dollars are spent improperly 
each year due to fraud, waste and mismanagement. No one knows 
exactly how many tax dollars are misspent because the Federal 
Government makes no systematic and comprehensive effort to keep 
track of improper payments.
    The subcommittee has examined the Federal Government's 
financial management problems through numerous hearings and 
other oversight activities. To cite a few examples:
 Each year, the subcommittee issues a financial 
management ``report card'' that grades the Federal Government 
as a whole and each of the 24 major agencies. This year, the 
Government earned an overall grade of ``D'' for its financial 
management in fiscal year 2001--down from a ``C-'' the previous 
year. Sixteen of the 24 agencies also received lower grades 
than in the prior year. Several agencies fell dramatically. The 
subcommittee applied more rigorous grading criteria this year 
than in the past. However, some agencies would have received 
the same low grades even under the more lenient criteria used 
in prior years.
 Most agencies cannot adequately track and collect 
debts that are legitimately owed to the Federal Government. 
Poor debt collection costs the Government billions of dollars 
in lost revenues and cheats the vast majority of citizens and 
businesses who meet their obligations to the Federal 
Government.
 Many Federal agencies fail to control the use of 
Government purchase and travel cards issued to their employees. 
The lack of controls have resulted in wasteful and abusive 
practices at the Department of Defense and many other agencies.
 The Defense Department has made hundreds of millions 
of dollars in illegal and improper ``adjustments'' to its 
appropriation accounts. These adjustments occurred because of 
the department's excessively complicated financial systems and 
the lack of basic internal controls.
    Similar to the subcommittee's work, the General Accounting 
Office [GAO] and agency Inspectors General consistently 
document Federal financial management problems. Every 2 years, 
the GAO issues a ``high-risk list'' of those Federal programs 
and activities that are most vulnerable to fraud, waste and 
abuse. Of the 23 items on the GAO's current high-risk list, 
four deal entirely with financial management problems and at 
least 10 others result, in part, from financial management 
weaknesses. The Inspectors General for the major Federal 
agencies also issue an annual ``top 10 list'' of the most 
serious problems facing their agencies. Twenty-three of the 26 
Inspectors General reporting this year included financial 
management on their top 10 list.
    Congress has enacted a framework of laws to resolve the 
Federal Government's pervasive financial management problems. 
However, progress in implementing those laws has been slow and 
uneven.
    All 24 major Federal agencies are now submitting timely 
annual audited financial statements, in compliance with the 
Chief Financial Officers Act and related laws. Most agencies 
are getting ``unqualified'' (or ``clean'') opinions on their 
financial statements. For fiscal year 2001, 18 of the 24 
agencies received clean audit opinions. In fiscal year 1996, 
the first year that audited financial statements were required, 
only 6 of the 24 agencies received clean opinions.
    Despite that improvement, there is much room for 
improvement. The Federal Government as a whole still cannot 
pass its annual audit, primarily due to the abysmal state of 
financial management at the Department of Defense, which 
consistently receives ``disclaimer'' opinions. Until the 
Defense Department gets its financial house in order, the 
Government as a whole will continue to fail its annual audit. 
Furthermore, the annual audits disclose that many agency 
financial systems still suffer from serious internal control 
weaknesses and often fail to comply with applicable laws and 
regulations.
    A ``clean'' audit opinion does not necessarily mean that an 
agency has good financial management systems. In fact, a clean 
opinion may even be misleading. That can occur because some 
agencies achieve clean opinions by working around their 
financial systems, rather than by relying on them. To achieve 
the ultimate goal of good financial management, Federal 
agencies must have financial systems that produce reliable, 
timely and useful information for day-to-day management and 
policymaking.
    Currently, the best indicator of healthy agency financial 
systems is whether they comply with the Federal Financial 
Management Improvement Act. Unfortunately, most do not. 
According to auditors, 20 of the 24 major agencies failed to 
comply with the act during fiscal year 2001.
    While the Federal Government is years away from operating 
on a sound financial management footing, the outlook for the 
future is positive. The President and the Office of Management 
and Budget [OMB] have demonstrated a genuine commitment toward 
solving the Federal Government's financial management woes. In 
August 2001, President Bush issued his ``President's Management 
Agenda,'' which laid out an ambitious set of priorities to 
address many of the Federal Government's most chronic 
management problems. Improved Financial Performance is one of 
five governmentwide priority initiatives in the President's 
Management Agenda. This initiative seeks to improve the 
timeliness and usefulness of financial information. It also 
seeks to reduce erroneous payments made by Federal agencies.
    The OMB developed a management ``scorecard'' that uses red, 
yellow and green ``traffic lights'' to assess Federal agency 
efforts toward achieving the goals of the President's 
Management Agenda. The OMB issued baseline evaluations in its 
scorecard for fiscal year 2001. With respect to financial 
management, 21 of the 26 agencies evaluated by the OMB received 
a red light--or unsatisfactory score. Four agencies received a 
yellow light for mixed results. Only one agency--the National 
Science Foundation--received a green light for success.
    The initial OMB baseline scores are consistent with the 
subcommittee's findings, as well as the findings of the GAO and 
Inspectors General. The OMB deserves credit for being candid in 
its evaluations. The test will be whether the OMB and the 
agencies follow though in coming years and improve those 
baseline scores.
    Although the Federal Government's financial management 
problems are deep-seated and severe, they are also solvable. 
Congressional oversight committees, the GAO and agency 
Inspectors General have proposed hundreds of specific 
recommendations for solutions. The administration, the OMB and 
the agencies themselves clearly recognize the root causes of 
the problems and their solutions.
    The subcommittee offers the following recommendations that 
focus on how to achieve the specific solutions that are already 
well documented.
 Above all else, a sustained leadership commitment 
and persistent follow-up is needed to resolve the Government's 
financial management problems. Such leadership must come from 
both the executive branch and Congress.
 Both the administration and Congress must provide 
the necessary resources to replace or re-engineer dysfunctional 
financial systems. In most cases, the resource investments that 
are needed are quite modest in relation to the benefits to be 
achieved.
 Accountability and incentives to produce results 
must accompany resources. Agencies should establish results-
oriented and measurable performance goals for financial 
management improvements. The administration and Congress must 
provide appropriate oversight to ensure that the goals are met.
 Although the basic statutory framework for achieving 
financial management success is already in place, the enactment 
of two additional measures would complement the existing 
framework. H.R. 4878, the ``Improper Payments Information Act 
of 2002,'' would require agencies to identify systematically 
areas in which they are vulnerable to making erroneous payments 
and to report on the steps they are taking to reduce these 
vulnerabilities. H.R. 4685, the ``Accountability of Tax Dollars 
Act of 2002,'' would extend to most executive branch agencies 
the requirement for audited annual financial statements. 
Currently, that requirement applies only to the Government's 24 
largest agencies. Both of these bills should be enacted into 
law.
 The administration, the OMB and individual agencies 
need to follow through in implementing the financial management 
improvement initiatives within the President's Management 
Agenda. In particular, the OMB needs to follow through on its 
financial management scorecard by periodically updating its 
evaluations in an objective and transparent manner. In doing 
so, the OMB must improve its guidance for evaluating agency 
compliance with the Federal Financial Management Improvement 
Act.
 Finally, the GAO, Inspectors General and 
congressional committees should vigorously pursue their 
independent auditing and oversight of agencies' efforts to 
improve their financial management systems and practices. This 
oversight should include, but not be limited to, an examination 
of agencies' success in meeting the criteria contained in the 
President's Management Agenda and the OMB scorecard.

                            II. Introduction

    The Committee on Government Reform has primary legislative 
and oversight jurisdiction with respect to ``Government 
management and accounting measures generally,'' as well as 
``overall economy, efficiency, and management of Government 
operations and activities, including Federal procurement.'' \1\ 
The committee also has the responsibility to determine whether 
laws and programs addressing subjects within its jurisdiction 
are being implemented in accordance with the intent of Congress 
and whether changes to the law are required.\2\
---------------------------------------------------------------------------
    \1\ Clause 1(h) (4) and (6) of Rule X , Rules of the House of 
Representatives, 107th Congress.
    \2\ Ibid., Clause 2(b)(1) (A)and (C).
---------------------------------------------------------------------------
    Pursuant to this authority, the Committee on Government 
Reform's Subcommittee on Government Efficiency, Financial 
Management and Intergovernmental Relations (the 
``subcommittee'') has held numerous oversight hearings and 
conducted many other oversight initiatives to explore the state 
of financial management in the Federal Government. This report 
presents the subcommittee's findings, conclusions and 
recommendations based on its financial management work over the 
past year.

                     III. Findings and Conclusions


 A. THE FEDERAL GOVERNMENT SUFFERS FROM PERVASIVE FINANCIAL MANAGEMENT 
                                PROBLEMS

    Nearly 200 years ago, President Thomas Jefferson recognized 
the need for effective financial management in the Federal 
Government:

        I think it an object of great importance . . . to 
        simplify our system of finance, and bring it within the 
        comprehension of every member of Congress . . . the 
        whole system [has been] involved in an impenetrable 
        fog. There is a point . . . on which I should wish to 
        keep my eye . . . a simplification of the form of 
        accounts . . . so as to bring everything to a single 
        centre[;] we might hope to see the finances of the 
        Union as clear and intelligible as a merchant's books, 
        so that every member of Congress, and every man of any 
        mind in the Union, should be able to comprehend them to 
        investigate abuses, and consequently to control 
        them.\3\
---------------------------------------------------------------------------
    \3\ Letter to Secretary of the Treasury Albert Gallatin, Apr. 1, 
1802, the Writings of Thomas Jefferson, Edited by Andrew A. Lipscomb 
(Washington, DC, 1905) Vol. 10, pps. 306-309.

    Jefferson's insights are equally relevant today. Sound 
financial management is essential to ensuring that the 
trillions of dollars that American taxpayers invest in their 
Federal Government are used appropriately and wisely. Financial 
management systems also must be able to produce information 
that managers and decisionmakers can rely on in order to 
determine whether Federal programs are achieving the 
performance results that citizens rightfully expect and demand 
of them.
    Unfortunately, deep-seated and pervasive financial 
management problems have plagued the Federal Government for 
many years. Audits consistently show that most agencies have 
significant weaknesses in their financial management controls 
and systems. As a result of these weaknesses, billions of 
taxpayer-provided dollars are lost each year to fraud, waste, 
misuse and mismanagement in hundreds of Federal programs. 
Furthermore, Federal decisionmakers do not have reliable, 
accurate and timely financial and management information to 
make informed decisions and monitor government performance on a 
routine basis.
    Every 2 years, the GAO issues a ``high-risk list'' of those 
Federal programs and activities that are most vulnerable to 
fraud, waste and abuse. Of the 23 items on the GAO's current 
high-risk list, 4 deal exclusively with financial management 
problems at the Department of Defense, the Forest Service, the 
Federal Aviation Administration and the Internal Revenue 
Service.\4\ At least 10 other items on the GAO's current high-
risk list result, in part, from financial management 
weaknesses.\5\
---------------------------------------------------------------------------
    \4\ See High-Risk Update, GAO-01-263 (January 2001), p. 10.
    \5\ These areas are: Medicare, Supplemental Security Income, Earned 
Income Credit Noncompliance, Collection of Unpaid Taxes, Defense 
Department Inventory Management, Housing and Urban Development 
Department programs, Student Financial Aid, Asset Forfeiture Programs, 
Defense Department Contract Management, and National Aeronautics and 
Space Administration Contract Management.
---------------------------------------------------------------------------
    Likewise, the Inspectors General for the major Federal 
agencies issue an annual ``top 10 list'' of the most serious 
problems facing their agencies. Twenty-three of the 26 
Inspectors General reporting this year included financial 
management on their top 10 lists.\6\
---------------------------------------------------------------------------
    \6\ The only major agencies at which financial management was not a 
top 10 problem area were the Department of Energy, the General Services 
Administration, and the Social Security Administration.
---------------------------------------------------------------------------
    Financial management weaknesses exact a heavy toll on the 
Government and its citizens. Countless billions of taxpayer 
dollars are spent improperly each year due to fraud, waste and 
mismanagement. No one knows exactly how many tax dollars are 
misspent because the Federal Government makes no systematic and 
comprehensive effort to keep track of improper payments. 
According to the GAO, the few agencies that voluntarily 
estimate erroneous payments for a handful of their programs 
report that such estimates total about $19 to $21 billion each 
year. The figure was $19.1 billion for fiscal year 2001, with 
fewer agencies volunteering estimates than the year before. In 
any event, the GAO concluded that the $19.1 billion figure did 
not present a true picture of the level of improper payments in 
Federal programs and activities. The GAO report stated:

        As significant as the $19 billion in improper payments 
        is, the actual extent of improper payments 
        governmentwide is unknown, is likely to be billions of 
        dollars more, and will likely grow in the future 
        without concerted and coordinated efforts by agencies, 
        the administration, and the Congress.\7\
---------------------------------------------------------------------------
    \7\ Financial Management: Coordinated Approach Needed to Address 
the Government's Improper Payments Problems, GAO-02-749 (August 2002), 
p. 3.

    Many GAO and Inspector General reports also point to 
deficient financial management and information systems as a 
major barrier to the efficient implementation of Federal 
operations on a day-to-day basis, and to assessing the 
effectiveness of program performance. Most agencies are unable 
to use their systems to produce comprehensive and reliable data 
on the costs of their programs. Some cannot use their systems 
to reliably determine where or how they are spending their 
money.

  B. A GOOD STATUTORY FRAMEWORK FOR FINANCIAL MANAGEMENT EXISTS, BUT 
                IMPLEMENTATION HAS BEEN SLOW AND UNEVEN

    In response to these problems, Congress enacted a series of 
laws over the past two decades that are designed to improve 
Federal financial management practices. The Chief Financial 
Officers Act of 1990 (CFO Act) (Public Law 101-576) represents 
the most comprehensive financial management reform legislation 
over the last 40 years. The CFO Act was amended and expanded by 
the Government Management Reform Act of 1994 (Public Law 103-
356) and the Federal Financial Management Improvement Act of 
1996 (Public Law 104-208). Other significant laws affecting 
Federal financial management include: the Budget and Accounting 
Procedures Act of 1950 (Chapter 946, 64 stat. 832); the 
Inspector General Act of 1978, as amended by the Inspector 
General Act Amendments of 1988 (Public Laws 95-452 and 100-
504); the Federal Managers' Financial Integrity Act of 1982 
(Public Law 97-255); the Debt Collection Act of 1982, as 
amended by the Debt Collection Improvement Act of 1996 (Public 
Laws 97-365 and 104-134, sec. 31001); and the Government 
Performance and Results Act of 1993 (Public Law 103-62). The 
key financial management provisions of these laws are 
summarized in Appendix A of this report.
    Audited Financial Statements. The CFO Act, as amended, is 
intended to provide a more effective, efficient and responsive 
Government. To that end, it requires 24 Federal departments and 
agencies to prepare and have audited annual financial 
statements covering all of their accounts and associated 
activities.\8\ These audited statements are to be sent to the 
Director of the OMB no later than March 1 of the year following 
the fiscal year for which the statements are prepared. Next 
year, the OMB will move up the reporting date from March 1 to 
February 1. Beginning in fiscal year 2003, the OMB will require 
agencies to prepare and submit unaudited interim financial 
statements on a quarterly basis.
---------------------------------------------------------------------------
    \8\ The 24 Federal agencies covered by the CFO Act include the 14 
Cabinet Departments: Agriculture, Commerce, Defense, Education, Energy, 
Health and Human Services, Housing and Urban Development, Interior, 
Justice, Labor, State, Transportation, Treasury, and Veterans Affairs. 
They also include the following 10 independent agencies: the 
Environmental Protection Agency, the National Aeronautics and Space 
Administration, the Agency for International Development, the Federal 
Emergency Management Agency, the General Services Administration, the 
National Science Foundation, the Nuclear Regulatory Commission, the 
Office of Personnel Management, the Small Business Administration, and 
the Social Security Administration.
---------------------------------------------------------------------------
    Also, the Government Management Reform Act requires that a 
set of consolidated governmentwide financial statements be 
prepared by the Secretary of the Treasury in coordination with 
the Director of the OMB. These consolidated financial 
statements are to be audited by the Comptroller General of the 
United States and forwarded to Congress by March 31 of each 
year. For fiscal year 2004, agencies will be required to 
produce audited financial statements no later than November 15 
and the U.S. Government's audited consolidated financial 
statements will be due by December 15.
    Federal Accounting Standards. Agencies use Federal 
accounting standards to prepare their financial statements and 
develop their financial management systems. In October 1990, 
the Secretary of the Treasury, the Director of the OMB, and the 
Comptroller General established the Federal Accounting 
Standards Advisory Board to develop a set of generally accepted 
accounting standards for the Federal Government. The approved 
standards are promulgated by the Comptroller General and 
Director of the OMB. These standards constitute generally 
accepted accounting principles for the Federal Government. In 
October 1999, the American Institute of Certified Public 
Accountants recognized Federal accounting standards as a 
generally accepted basis of accounting. This recognition was a 
major milestone in improving public confidence in the 
reliability and credibility of Federal financial information.
    The Director of the OMB is responsible for setting the form 
and content of the financial statements against which the 
auditor must measure an agency's financial statements. The 
guidance provided by the OMB incorporates the standards 
recommended by the Federal Accounting Standards Advisory Board.
    Financial Management Systems. Financial management systems 
with well-defined and effective governmentwide functional 
requirements assist agencies in developing strong systems by 
eliminating duplicate work among agencies and providing a 
common framework so that commercial vendors can economically 
provide systems software. The Joint Financial Management 
Improvement Program [JFMIP] helps establish uniform 
requirements as part of a process of improving financial 
management systems.
    Internal Controls. The Federal Managers' Financial 
Integrity Act and the Federal Financial Management Improvement 
Act place great emphasis on the importance of effective 
internal controls. Their importance cannot be overstated in the 
large, complex operating environment of the executive branch of 
the Federal Government. Effective internal controls are the 
first line of defense against fraud, waste and mismanagement of 
agency budgets. They also help ensure that agencies achieve 
their missions in the most effective and efficient manner. The 
subject of internal controls generally surfaces after 
improprieties or inefficiencies are found. However, good 
managers continually seek new ways to improve their operations 
through effective internal controls.
    The committee stresses that internal controls can be 
designed to provide reasonable, not absolute, assurance that an 
organization's activities are being accomplished in accordance 
with its objectives. The full cost of fraud, waste, misuse and 
mismanagement cannot always be known or measured. If improper 
activities are allowed to continue, public confidence is eroded 
in the Government's ability to manage its programs effectively 
or honestly. Such erosion cannot be measured in terms of 
dollars. The trust of the citizenry in its Government is a 
priceless relationship.
    As discussed hereafter, progress in implementing the 
financial management reform legislation has been slow and 
highly uneven. Agencies are doing a much better job of 
preparing their financial statements on time, and most are now 
getting unqualified, or clean audit opinions. To meet the 
ultimate goals of the legislation, however, agencies need to be 
able to generate timely, accurate and useful financial 
management information. They also need to have effective 
internal controls in place to ensure that funds are spent 
properly and with full and accurate accountability to the 
American taxpayers. And they must be able to integrate 
financial and performance data in order to report meaningfully 
on their performance results, monitor and execute their day-to-
day operations, and make informed decisions about the 
effectiveness of their programs. The Federal Government as a 
whole and most individual agencies still fall far short of 
these goals.

   C. FISCAL YEAR 2001 FINANCIAL STATEMENT AUDITS SHOW MIXED RESULTS

    The fiscal year 2001 annual audited financial statements 
for the 24 Federal departments and agencies covered by the CFO 
Act, as amended, were due to be filed with the OMB on February 
27, 2002. On March 29, 2002, the GAO issued its fifth annual 
audit report on the financial statements of the Federal 
Government. At a subcommittee hearing on April 9, 2002, the 
Comptroller General of the United States released the fiscal 
year 2001 audit results.
    Similar to last year, 18 of the 24 agencies received 
unqualified--or clean--audit opinions on their fiscal year 2001 
financial statements. In fiscal year 1996, the first year 
agencies were required to produce audited financial statements, 
only six agencies received clean opinions. Equally noteworthy, 
all 24 agencies produced their audited financial statements by 
the reporting deadline of February 27, 2002. Also, for the 
first time, agency reports and the governmentwide statements 
included comparative reporting, which allows the reader to 
compare the financial information to that of the previous year.
    On the other hand, the Federal Government as a whole 
received a disclaimer audit opinion for the 5th consecutive 
year. Several major individual agencies--including the 
Departments of Agriculture and Defense--also received 
disclaimer opinions. The disclaimer opinion at the Defense 
Department is particularly significant since it represents the 
greatest impediment to the Federal Government achieving a clean 
opinion governmentwide.
    The Comptroller General reported that, as has been the case 
for the past 4 fiscal years--

        a significant number of material weaknesses related to 
        financial systems, fundamental record-keeping and 
        financial reporting, and incomplete documentation 
        continued to (1) hamper the Government's ability to 
        accurately report a significant portion of its assets, 
        liabilities, and costs, (2) affect the Government's 
        ability to accurately measure the full cost and 
        financial performance of certain programs and 
        effectively manage related operations, and (3) 
        significantly impair the Government's ability to 
        adequately safeguard assets and properly record various 
        transactions.\9\
---------------------------------------------------------------------------
    \9\ ``U.S. Government Financial Statements: Fiscal Year 2001 
Results Continuing Need to Accelerate Federal Financial Management 
Reform,'' GAO-02-599T, Apr. 9, 2002.

    Specifically, the GAO was unable to express an opinion on 
the reliability of the governmentwide financial statements 
because of the Federal Government's inability to:
 properly account for and report on billions of 
dollars worth of property, equipment, materials, supplies and 
certain stewardship assets, primarily at the Department of 
Defense;
 use effective processes and procedures to estimate 
the cost of certain major Federal credit programs and the 
related loans receivable and loan guarantee liabilities;
 support amounts reported for certain liabilities, 
such as environmental and disposal liabilities and related 
costs at the Department of Defense, and ensure complete and 
proper reporting for commitments and contingencies;
 support major portions of the total net cost of 
Government operations, most notably related to the Department 
of Defense and the Department of Agriculture, and ensure that 
all disbursements are properly recorded;
 fully account for and reconcile intra-governmental 
activity and balances; and
 properly prepare the Federal Government's financial 
statements, including balancing statements, eliminating 
substantial amounts of transactions between governmental 
entities, fully ensuring that the information in the 
consolidated financial statements is consistent with the 
underlying agency financial statements, and adequately 
reconciling the results of operations to budget results.
    The GAO's audit report \10\ also identified a broad array 
of financial management problems that limit the Federal 
Government's ability to safeguard its assets, properly record 
transactions, and comply with selected provisions of laws and 
regulations related to financial reporting. According to the 
GAO, these problems affect the reliability of the 
governmentwide financial statements as well as the related 
underlying financial information. More important, the GAO noted 
these problems ``also affect the Government's ability to 
accurately measure the full cost and financial performance of 
certain programs and effectively manage related operations.'' 
For fiscal year 2001, 21 of the 24 CFO Act agencies were found 
to have material weaknesses.\11\ Furthermore, almost all 
agencies were reported as having computer security weaknesses. 
As a result, the Federal Government's financial and other 
sensitive information is susceptible to inappropriate 
disclosure, destruction, modification, and fraud.
---------------------------------------------------------------------------
    \10\ ``Fiscal Year 2001 Financial Report of the United States 
Government.''
    \11\ A material weakness, as defined by the American Institute of 
Certified Public Accountants in its Statements of Auditing Standards 
and in the Comptroller General's Government Auditing Standards, is a 
condition in which the design or operation of one or more of the 
internal control components does not reduce to a relatively low level 
the risk that errors or irregularities in amounts that would be 
material to the financial statements may occur and not be detected 
promptly by employees in the normal course of performing their duties.
---------------------------------------------------------------------------
    Noncompliance with applicable requirements in laws and 
regulations related to financial reporting continues to be a 
pervasive problem among the 24 agencies. Based on fiscal year 
2001 audit reports, only 3 of the 24 agencies were reported to 
be in compliance with the laws and regulations.
    Twenty of the agencies were not compliant with the 
requirements of the Federal Financial Management Improvement 
Act of 1996--a key financial management law enacted to ensure 
that agencies' financial management systems produce timely, 
accurate and useful financial information. The GAO stated that 
``noncompliance with FFMIA is indicative of the overall 
continuing poor condition of many financial management systems 
across Government.'' The Comptroller General testified in this 
regard that agency financial systems overall are in poor 
condition and cannot provide reliable financial information 
necessary for managing day-to-day Government operations.
    The Comptroller General cautioned that it will be essential 
for the Government to move away from the extraordinary efforts 
many agencies now use to attain clean opinions and move toward 
strengthening their financial systems, reporting and controls. 
Further, he stated that ``many agencies do not have timely, 
accurate and useful financial information, including cost data, 
and do not have sound controls with which to make informed 
decisions and ensure accountability on an ongoing basis.'' 
Agencies must have modern financial management systems and 
effective controls in order to reach the goal of providing the 
reliable financial information necessary for managing daily 
Government operations.

  D. THE SUBCOMMITTEE'S FINANCIAL MANAGEMENT REPORT CARD SHOWS LOWER 
                            GRADES THIS YEAR

    In each of the last 4 fiscal years, the subcommittee has 
issued a financial management ``report card'' for the Federal 
Government as a whole and the 24 CFO Act agencies. The report 
card is a gauge for Congress to determine agencies' progress in 
improving their financial management.
    At its April 9, 2002, hearing on the fiscal year 2001 
financial statement audit results, the subcommittee released 
its fifth annual report card measuring the effectiveness of 
financial management in the 24 CFO Act agencies. The grades 
were based on the results of the audit reports prepared by 
agencies' Inspectors General, independent public accountants, 
and the U.S. General Accounting Office.
    This year, the subcommittee used more rigorous grading 
criteria than in the past. The purpose of the higher standards 
was to place less weight on clean audit opinions and to place 
more weight on whether agency financial systems were actually 
capable of producing timely, reliable and useful data to 
support day-to-day operations. Appendix B describes the 
subcommittee's grading criteria in more detail.
    Unfortunately, the grades for fiscal year 2001 were again 
dominated by ``D's'' and ``F's.'' As a result, the subcommittee 
determined that the Federal Government as a whole earned a 
``D.'' Sixteen agencies received a lower grade than last year. 
Most dramatically, the National Aeronautics and Space 
Administration fell from an ``A'' to an ``F,'' and the Small 
Business Administration fell from an ``A'' to a ``D-plus.'' It 
is important to note that these two agencies would have 
suffered the same decline in their grades even under the more 
lenient criteria that the subcommittee used in prior years.
    The failures of a few agencies continue to tarnish the 
record of the executive branch. For the 5th consecutive year, 
the Agency for International Development, and two of the 
Government's largest departments--the Department of Defense and 
the Department of Agriculture--received the unacceptable grades 
of ``F.''
    Although 18 agencies received clean audit opinions, 
significant financial management problems continue to prevent 
these agencies from achieving the ultimate goal of maintaining 
financial systems that allow them to produce timely, accurate 
and reliable financial information on a day-to-day basis.
    [The Fiscal Year 2001 Financial Management Status Report 
follows:]


         E. ADDITIONAL FINANCIAL MANAGEMENT OVERSIGHT HEARINGS

    In addition to its April 9 hearing on the fiscal year 2001 
financial audit results and scorecard, the subcommittee held a 
number of other hearings on financial management issues.
    ``The Internal Revenue Service: The Commissioner's Final 
Report,'' April 15, 2002. This hearing focused on the progress 
being made by the Internal Revenue Service [IRS] in addressing 
its longstanding management and performance problems. This 
hearing highlighted the need for continued involvement and 
commitment by IRS senior management to ensure that the IRS 
successfully addresses its serious financial management 
problems.
    The IRS is responsible for collecting taxes, processing tax 
returns, pursuing collection of amounts owed, and enforcing tax 
laws. In fiscal years 2000 and 2001, the IRS collected over $2 
trillion in tax payments, processed over 210 million tax 
returns, and paid about $251 billion and $194 billion, 
respectively, in refunds to taxpayers.
    The IRS prepares financial statements on its custodial 
operations--revenues collected, refunds paid, and related taxes 
receivable and payable--and its administrative activities. 
During the fiscal year 2001 audit, the GAO found that ``one of 
the largest obstacles facing IRS management today is that the 
agency still does not have a financial management system 
capable of producing reliable and timely information its 
managers need to make day-to-day decisions.'' \12\
---------------------------------------------------------------------------
    \12\ Financial Audit: IRS's Fiscal Years 2001 and 2000 Financial 
Statements, GAO-02-414, Feb. 27, 2002.
---------------------------------------------------------------------------
    The agency continues to experience pervasive internal 
control weaknesses that have been reported on by the GAO since 
fiscal year 1992. In fiscal year 2001, for the 2nd consecutive 
year, the IRS received a clean opinion on its financial 
statements. However, as in previous years, because of serious 
systems and control weaknesses, the IRS again relied 
extensively on costly, time-consuming processes; statistical 
projections; external contractors; substantial adjustments; and 
monumental human efforts to derive its financial statements. 
The GAO noted that the IRS has corrected or mitigated many of 
the computer security weaknesses cited in previous reports, and 
is implementing a computer security program that should, when 
fully implemented, help to manage its risks in this area. 
However, the GAO noted that security weaknesses continue to 
exist in the IRS's computing environment.
    The Commissioner of the IRS noted that the IRS can be proud 
of its progress over the past year.
    ``The Department of Defense: What is Being Done to Resolve 
Longstanding Financial Management Problems?'' March 20, 2002. 
This hearing focused on the status of financial management at 
the Department of Defense.
    The Department of Defense is the largest of the 14 Cabinet-
level departments. As noted previously, it has been cited as 
the largest impediment to an unqualified opinion on the 
consolidated financial statements. For the past 4 years, the 
Inspector General has been unable to render an opinion on the 
Department of Defense's financial statements. For fiscal year 
2001, the Department's Inspector General issued another 
disclaimer on the Department of Defense's financial statements. 
The Under Secretary of Defense (Comptroller) has acknowledged 
that the Department's financial management and feeder systems 
do not provide adequate evidence to support various material 
amounts on the financial statements.
    Section 1008 of the National Defense Authorization Act for 
fiscal year 2002 directs the Department's Inspector General to 
perform only the minimum audit procedures required by auditing 
standards for year-end financial statements that management 
acknowledges are unreliable. The act also directs the Inspector 
General to redirect any audit resources freed up by that 
limitation to be used to improve the Department's financial 
systems. For fiscal year 2001, the department's Inspector 
General limited its internal control review to following up on 
the status of corrective actions relating to material 
weaknesses that had been reported in prior audits. In addition, 
auditors performed limited tests of the Department's compliance 
with laws and regulations. They did not test for compliance 
with Federal Financial Management Improvement Act, but rather 
relied on management's acknowledgment that many critical 
financial management systems do not comply with the act.
    The GAO stated that the Department of Defense faces 
financial management problems that are complex, longstanding, 
and deeply rooted in virtually all business operations 
throughout the department. In September 2001, Secretary of 
Defense Donald Rumsfeld announced a departmentwide initiative 
intended to transform the full range of the Department's 
business processes, including decades-old financial systems 
that are not integrated.
    In addition to its longstanding financial management 
systems problems, the Department of Defense cannot account for 
the billions of tax dollars expended on its purchase and travel 
card programs. During the 107th Congress, the subcommittee held 
six hearings on this subject. The subcommittee learned from 
these hearings that ineffective controls and lack of oversight 
have resulted in fraudulent and serious abuse in the travel and 
purchase credit card programs at the Department.
    ``The National Aeronautics and Space Administration: What 
Went Wrong?'' March 20, 2002. This hearing focused on the 
status of financial management for fiscal year 2001 and on 
actions the National Aeronautics and Space Administration 
[NASA] is taking to resolve its financial management problems.
    Until fiscal year 2001, NASA had received unqualified 
opinions on its financial statements. For the past 5 years, 
NASA's Office of the Inspector General contracted with the 
independent certified public accounting firm of Arthur Andersen 
to audit its financial statements. During this period, Arthur 
Andersen auditors consistently reported that NASA's financial 
statements were fairly stated and they issued unqualified 
opinions.
    However, for fiscal year 2001, the Office of the Inspector 
General contracted with PricewaterhouseCoopers to audit NASA's 
financial statements. PricewaterhouseCoopers auditors reported 
that they were unable to determine whether the financial 
statements for fiscal year 2001 were reliable. Auditors issued 
a disclaimer on these statements because of significant 
internal control weaknesses. In addition, for the past 4 years, 
NASA's financial management systems were reported in compliance 
with the Federal Financial Management Improvement Act. This 
year, however, Pricewater-houseCoopers concluded that the 
agency's systems were not in compliance with the act.
    The GAO noted that NASA's financial management problems are 
not new. NASA has been on the GAO high-risk list for contract 
management since 1990. In addition, the fiscal year 2001 audit 
report identified a number of significant internal control 
weaknesses related to accounting for space station material and 
equipment, and computer security.
    ``H.R. 4685, the Accountability of Tax Dollars Act of 
2002,'' May 14, 2002. On May 8, 2002, Representative Patrick 
Toomey (R-PA) introduced H.R. 4685, the ``Accountability of Tax 
Dollars Act of 2002.'' This bill would expand the number of 
Federal agencies required to prepare audited financial 
statements to include all Federal agencies with total annual 
budget authority of $25 million. The subcommittee's hearing 
examined the merits of this bill and also heard testimony from 
Federal agencies on the merits of audited financial statements.
    In 2001, the GAO conducted a survey of 26 non-CFO Act 
agencies. The GAO found that within the past 5 years, 12 of 
these agencies were preparing annual financial statements and 
were having them audited. The remaining 14 agencies prepared 
financial statements but did not have them audited. The survey 
also found that 21 of the 26 agencies believe that it is 
beneficial to have audited financial statements.
    Witnesses agreed that audited financial statements are 
beneficial, but some had concerns about the costs associated 
with these audits. As the CFO Act has shown, requiring Federal 
departments and agencies to prepare and have audited annual 
financial statements can contribute significantly to their 
ability to provide reliable, timely and useful information. 
Enactment of this legislation would help ensure greater 
accountability of the billions of tax dollars the Federal 
Government spends each year.
    ``The Federal Financial Management Improvement Act of 1996: 
Are Agencies Meeting the Challenge?'' June 6, 2002. Most 
Federal agencies cannot produce the financial information they 
need to manage their day-to-day operations efficiently and 
effectively. In enacting the CFO Act in 1990 and other 
financial management legislation, Congress sought to improve 
this longstanding problem. The Federal Financial Management 
Improvement Act of 1996 [FFMIA] builds on the CFO Act by 
emphasizing the need for agencies to have systems that can 
generate reliable, timely, and useful information with which to 
make informed decisions.
    On June 6, 2002, the subcommittee held an oversight hearing 
on the status of the 24 CFO Act agencies in implementing the 
FFMIA. The hearing focused on the challenges confronting the 24 
major Federal departments and agencies in their efforts to 
comply with the requirements of the act.
    The GAO noted that many agencies continue to struggle with 
complying with the FFMIA because of the overall longstanding 
poor condition of many financial management systems throughout 
the Government. Most systems were originally designed and 
developed years ago and do not meet current systems 
requirements. As a result, these ``legacy'' systems cannot 
provide reliable financial information for key governmentwide 
initiatives, such as integrating budget and performance 
information. Efforts to implement commercial off-the-shelf 
software frequently run over budget and require long 
implementation periods. The weaknesses reported by auditors 
ranged from serious, pervasive systems problems to less serious 
problems that may affect one aspect of an agency's operation. 
The GAO noted six primary reasons why agencies are not 
complying with FFMIA: (1) nonintegrated financial management 
systems; (2) inadequate reconciliation procedures; (3) untimely 
recording of financial information; (4) noncompliance with the 
Federal Government's Standard General Ledger; (5) failure to 
adhere to Federal accounting standards, and (6) weak security 
over information systems.
    The GAO also noted one especially significant fact. Even 
though more agencies received unqualified or clean audit 
opinions, their ongoing noncompliance with FFMIA's requirements 
prevent these same agencies from meeting the intent of the 
financial management reform legislation--to report reliable, 
useful and timely financial information. Twenty of 24 CFO Act 
agencies did not have financial management systems that comply 
with FFMIA, even though 14 of these agencies received clean 
audit opinions. According to the GAO, these clean audit 
opinions are attained only by agencies expending significant 
resources on extensive ad hoc procedures.
    Meeting the requirements of FFMIA presents longstanding, 
significant challenges that will be attained only through time, 
investment and sustained emphasis. The subcommittee learned at 
this hearing that to achieve the financial management 
improvements envisioned by the CFO Act, FFMIA and more recently 
the President's Management Agenda, agencies need to modernize 
and integrate their financial systems to generate reliable, 
useful, and timely financial information throughout the year 
and at year-end. As noted by the GAO, ``a strong commitment 
from the President, the Joint Financial Management Improvement 
Program principals, and the Secretaries of major departments 
and agencies is critical to the success of efforts underway.'' 
\13\ That type of management commitment must be clearly 
demonstrated if the goals of FFMIA are to be met.
---------------------------------------------------------------------------
    \13\ ``Financial Management: Effective Implementation of FFMIA Is 
Key to Providing Reliable, Useful, and Timely Data,'' GAO-02-791T, June 
6, 2002.
---------------------------------------------------------------------------
    ``Medicaid Claims: Who's Watching the Money?'' June 13, 
2002. Medicaid is the third largest social program in the 
Federal budget and one of the largest components of State 
budgets. The Centers for Medicare and Medicaid Services, a 
component of the Department of Health and Human Services, 
administers the Medicaid program. Although it is a Federal 
program, Medicaid consists of 56 distinct programs--including 
one for each State, U.S. territory, Puerto Rico, and the 
District of Columbia. Medicaid provides healthcare for 40 
million low-income residents. In fiscal year 2001, the program 
was projected to cost the Federal Government about $124 billion 
and State governments about $95 billion in program and 
administrative expenses.
    The subcommittee's hearing focused on the oversight of 
Medicaid expenditures by Federal and State governments and the 
actions taken to ensure the propriety of the Medicaid claims. 
The GAO found that the Centers for Medicare and Medicaid has 
financial oversight weaknesses that leave the Medicaid program 
vulnerable to improper payments. The OMB reported to Congress 
that the Government made $12.1 billion in erroneous Medicare 
payments last year. However, there is no mechanism in place to 
estimate the amount of erroneous or improper payments that may 
have been in the Medicaid program. The Principal Deputy 
Inspector General of the Department of Health and Human 
Services noted that the Centers for Medicare and Medicaid is in 
the early stage of putting together a demonstration project in 
nine States to develop with a methodology to identify Medicaid 
improper payment rates.
    ``The Single Audit Act: Is it Working?'' June 26, 2002. The 
Single Audit Act, as amended, requires State and local 
governments and nonprofit organizations that annually expend 
$300,000 or more in Federal awards to have audits conducted in 
accordance with OMB Circular A-133, Audits of States, Local 
Governments, and Non-Profit Organizations. Federal awards 
include grants, loans, guarantees, property, cooperative 
agreements, interest subsidies, insurance, food commodities, 
direct appropriations and Federal cost reimbursement contracts. 
According to the OMB, in fiscal year 2001, the Federal 
Government awarded about $325 billion to State and local 
governments, and nonprofit organizations. The Single Audit Act 
is intended to promote sound financial management, including 
effective internal controls over Federal awards.
    The subcommittee's hearing focused on how Federal agencies 
are using the results of the single audits and the actions they 
are taking to ensure that the deficiencies identified in the 
audits are corrected. The GAO noted three issues that merit 
additional attention. These issues involve questions about 
whether (1) all required audits are being performed, (2) 
recipients are properly monitoring sub-recipients, and (3) the 
quality of audits being performed. The Controller for OMB also 
emphasized the need for improved audit quality and noted that 
the quality of audits is inconsistent.
    The subcommittee also learned at this hearing that OMB 
plans to increase the single audit threshold from $300,000 to 
$500,000. The OMB noted that this increase reduces the burden 
on smaller non-Federal entities and concentrates scrutiny where 
the Federal risk is the greatest. The GAO basically supports 
OMB's increased audit threshold. However, the GAO emphasized 
the need for continued monitoring of sub-recipients.

   F. THE ADMINISTRATION IS TAKING THE LEAD ON FINANCIAL MANAGEMENT 
                              IMPROVEMENT

    The ``President's Management Agenda,'' which President Bush 
issued in August 2001, consists of 14 priority management-
improvement initiatives. These initiatives target the core 
management and capacity problems that face the Federal 
Government. Congressional committees, the General Accounting 
Office, and agency Inspectors General have repeatedly 
documented the seriousness and persistence of these problems.
    One of the five governmentwide initiatives is Improved 
Financial Performance. This initiative seeks to improve the 
timeliness and usefulness of financial information. It also 
seeks to reduce erroneous payments made by Federal agencies.
    The President's fiscal year 2003 Budget, released on 
February 4, 2002, includes a ``scorecard'' that provides a 
baseline evaluation of where Federal agencies currently stand 
on each of the five governmentwide initiatives. The scorecard 
issued by the OMB uses a ``traffic light'' system: green for 
success, yellow for mixed results, and red for unsatisfactory. 
Red is by far the predominant color in the initial scoring. The 
total 130 scores for 26 agencies include 110 reds, 19 yellows, 
and only 1 green.
    With respect to financial management, 21 of the 26 agencies 
evaluated received unsatisfactory red scores. Four agencies 
received yellow scores for mixed results. Only one agency--the 
National Science Foundation--received a green score for success 
in financial management.
    The budget establishes specific criteria for each of the 
five initiatives that provide the basis for the scores. The 
criteria serve as goals for success in each of the five areas, 
and thereby give agencies a road map on how to get from red to 
green. Officials in the OMB did the scoring. According to the 
OMB, the President personally discussed the scores with agency 
heads during their budget reviews. The OMB will evaluate 
agencies every 6 months on their progress toward improving. A 
new round of scores will be included in each future budget.
    The President's Management Agenda, the OMB scorecard and 
the President's fiscal year 2003 budget reflect an 
unprecedented leadership commitment toward improving the 
performance of the Federal Government in financial management 
and other chronic problem areas. The scorecard, with its 
specific goals for success and systematic evaluations, should 
serve as a catalyst for resolving core management problems that 
have plagued the Federal Government for decades.

                          IV. Recommendations

    Although the Federal Government's financial management 
problems are deep-seated and severe, they are also solvable. 
Congressional oversight committees, the GAO and agency 
Inspectors General have proposed hundreds of specific 
recommendations to resolve these problems. The administration, 
the OMB and the agencies themselves clearly recognize the root 
causes of the problems and their solutions.
    The subcommittee offers the following recommendations 
toward achieving the specific solutions that are already well 
documented.
 Above all else, sustained leadership commitment to 
fix the problems and persistent follow-up until the job is done 
is needed. Such leadership must come from both the executive 
branch and Congress. As discussed previously, the actions 
needed to resolve the Federal Government's financial management 
problems are well known. Leaders must now supply the political 
will and commitment to implement these solutions. The President 
and the OMB are demonstrating the kind of leadership that is 
needed. Congress must do its part through the appropriations 
and oversight processes.
 Strong oversight is one of Congress's most effective 
tools in the effort to ensure that executive branch departments 
and agencies implement necessary legislative reforms. To build 
upon this, Congress needs to conduct regular oversight hearings 
to review the status of agencies' progress toward improving 
financial management, including planned actions to resolve 
related problems. When appropriate, each department or agency 
should be regularly reviewed by its oversight, authorization 
and appropriations subcommittees regarding its progress in 
reforming its financial management systems and processes. These 
hearings should be held annually, semiannually or quarterly, 
depending on the severity of the financial problems within the 
department or agency. This would assist Congress in effectively 
monitoring agency progress and taking corrective actions as 
necessary.
 The administration and Congress must provide the 
necessary resources to replace or re-engineer dysfunctional 
financial systems. In most cases, the resource investments 
needed to improve financial management systems are quite modest 
in relation to the benefits to be achieved. However, funding 
financial management improvements tends to be a low priority in 
this era of tight budgets and competing needs. Nevertheless, 
such investments will repay themselves many times over in 
reduced fraud, waste and abuse and increased efficiency.
 Accountability and incentives to produce results 
must accompany resources. Agencies should establish results-
oriented and measurable performance goals for financial 
management improvements. For example, agencies need to 
establish specific performance goals to reduce improper 
payments. Agencies also should establish measurable goals for 
improvements to their underlying financial management systems. 
Such goals need to be more sophisticated than simply getting 
clean audit opinions and complying with applicable legal 
requirements.
 The administration and Congress must provide 
appropriate oversight to ensure that financial management 
improvement resources are applied wisely and that performance 
goals are met. It is clear that congressional oversight alone 
cannot effect the necessary change in financial management 
practices at all departments and agencies. The subcommittee 
again notes that incentives are needed to prompt agencies to 
resolve their outstanding financial management problems. If an 
agency is unable or unwilling to effect these crucial changes, 
Congress has the authority to provide incentives for change. 
These incentives include: (1) redirecting a percentage of the 
agency's appropriated program or administrative funding toward 
correcting financial management problems; (2) restricting a 
percentage of the agency's appropriated funds until the 
problems are corrected; or (3) reducing various amounts of 
appropriated funds until the agency has completed its 
correction efforts. Furthermore, reducing appropriated funds 
should be considered for all agencies failing to comply with 
the OMB's accelerated reporting deadlines.
 Although the basic statutory framework for achieving 
financial management success is already in place, the enactment 
of two additional measures would complement the existing 
framework. H.R. 4878, the ``Improper Payments Information Act 
of 2002,'' would require agencies to identify systematically 
areas in which they are vulnerable to making erroneous payments 
and to report on steps they are taking to reduce these 
vulnerabilities. H.R. 4685, the ``Accountability of Tax Dollars 
Act of 2002,'' extends to most executive branch agencies the 
requirement for audited annual financial statements that now 
applies only to the largest agencies. Both of these bills 
should be enacted into law.
 The administration, the OMB and the individual 
agencies need to follow through in implementing the financial 
management improvement initiatives in the President's 
Management Agenda. In particular, the OMB needs to follow 
through on its financial management scorecard by periodically 
updating its evaluations in an objective and transparent way. 
To achieve success in financial management, agencies must 
comply with the Federal Financial Management Improvement Act. 
To determine compliance with this act, it is imperative that 
auditors perform sufficient testing of agencies' systems and 
provide positive assurance or issue an opinion. Currently, OMB 
Bulletin 01-02, Audit Requirements for Federal Financial 
Statements, does not require auditors to make an affirmative 
statement regarding an agency's compliance with the act. 
Rather, it permits auditors to report negative assurance, 
meaning that their report can be based on limited audit testing 
that disclosed no substantial instances of noncompliance. In 
recent correspondence to the OMB, this subcommittee expressed 
concern with the language in the OMB's guidance and requested 
that it be changed. The OMB should change its guidance to 
require an affirmative opinion on compliance with the act.
 Finally, the GAO, Inspectors General and 
congressional committees should vigorously pursue their 
independent auditing and oversight of agencies' efforts to 
improve their financial management systems and practices. This 
oversight should include, but not be limited to, an examination 
of agencies' success in meeting the criteria contained in the 
President's Management Agenda and the OMB scorecard.


       Appendix B.--Basis for Agency Financial Management Grades

    This is the 5th year that the Subcommittee on Government 
Efficiency, Financial Management and Intergovernmental 
Relations (and its predecessor subcommittee) has issued a 
report card on the status of financial management at the 24 
Federal agencies that are subject to the Chief Financial 
Officers Act. The report card grades each agency's progress in 
achieving good financial management.
    In previous years, the subcommittee based its grades on the 
agencies' annual audited financial statements, required under 
the Government Management Reform Act of 1994. The grades for 
each of the 24 departments and agencies are based on the 
results of the financial statement audits. These audits were 
performed by the agency's Inspector General, independent public 
accounting firms, and the General Accounting Office. All 
auditors were required to follow generally accepted Government 
auditing standards. These standards incorporate the American 
Institute of Certified Public Accountant's Statements on 
Auditing Standards, the same standards required for audits of 
private sector entities. However, Generally Accepted Government 
Auditing Standards [GAGAS] adds certain requirements beyond the 
Statements on Auditing Standards. Most notably, GAGAS has 
additional reporting requirements beyond an opinion on the 
financial statements.
    Three reports are required at the completion of each audit 
of Government entities under GAGAS and as incorporated in OMB 
Bulletin 98-08, Audit Requirements for Federal Financial 
Statements. These reports are an opinion of the financial 
statements, a report on internal controls, and a report on 
compliance with laws and regulations.
    The opinion provides the auditor's assessment of the 
reliability of the information contained in the financial 
statements. There are four types of opinions that the auditor 
can render--Unqualified, Qualified, Adverse, or Disclaimer. An 
unqualified opinion signifies that the information in the 
financial statements was reliable in all material respects.
    A qualified opinion signifies that, except for specified 
information in the financial statements, the information is 
reliable. An adverse opinion means the statements are not 
reliable. Last, a disclaimer of opinion signifies that the 
auditor was unable to determine if material information in the 
statements was reliable.
    The report on internal control provides an assessment by 
the auditors of the effectiveness of internal controls. The 
report is required to identify any instances of material 
weaknesses or reportable conditions in internal controls that 
surfaced during the course of the audit. The American Institute 
of Certified Public Accountants defines a material weakness in 
internal controls as ``. . . a condition in which the design or 
operation of one or more of the internal control components 
does not reduce to a relatively low level the risk that errors 
or irregularities in amounts that would be material in relation 
to the financial statements being audited may occur and not be 
detected within a timely period by employees in the normal 
course of performing assigned functions.'' \15\
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    \15\ Codification of Statements on Auditing Standards (Including 
Statements on Standards for Attestation Engagements), Numbers 1 to 82, 
American Institute of Certified Public Accountants, as of Jan. 1, 1997; 
AU Section 325.15.
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    The report on compliance with the laws and regulations 
provides the auditor's assessment of instances in which the 
agency did not follow or conform materially to requirements of 
the laws and regulations deemed material to the financial 
operations of that agency. The Office of Management and Budget 
also provides guidance to the auditors in OMB Bulletin 98-08 
regarding which general laws and regulations need to be 
considered during the audit.
    Starting with fiscal year 1997, an agency's adherence to 
FFMIA must be assessed in the report on compliance with laws 
and regulations, in accordance with OMB guidance. FFMIA 
specifically requires that agencies conform to promulgated 
Federal Government accounting and systems standards, and use 
the Government standard general ledger. Many agencies did not 
materially conform to the requirements of FFMIA.
    The subcommittee reviewed each financial report on an 
absolute scale and assessed grades on a 4 point scale with 
``A'' = 4, ``B'' = 3, ``C'' = 2, ``D'' = 1, ``F'' = 0. In the 
audit opinion category, an unqualified, or ``clean,'' opinion 
earned 4 points. A qualified opinion received 2 points; and a 
disclaimer received 0 points.\16\ If auditors reported no 
material weaknesses in internal controls, the agency received 4 
points. Conversely, if material weaknesses were reported, the 
agency received 0 points in that category. If auditors reported 
that the agency appeared to be in compliance with Federal 
financial management laws and regulations, the agency received 
4 points. Any reports of material noncompliance resulted in 0 
points.
---------------------------------------------------------------------------
    \16\ There were no adverse opinions rendered in fiscal years 1996 
through 2001; however, an adverse opinion would have also received 0 
points.
---------------------------------------------------------------------------
    The points in the three categories were then averaged (with 
equal weight) to determine the overall grade for the agency. 
Thus, if an agency received an unqualified audit opinion and 
the auditors reported no material internal control weaknesses 
or instances of non-compliance, the agency received a grade of 
A (4+4+4=123=4).
    This year, the subcommittee has added four new categories 
to its grading criteria. These additional categories place 
greater emphasis on whether agency financial systems can 
produce reliable and useful data on a real-time basis to 
support day-to-day management and policymaking. This is 
consistent with the view espoused by the General Accounting 
Office, the Office of Management and Budget and other experts 
that a successful financial management program requires much 
more than simply getting an unqualified audit opinion and 
complying with legal and accounting requirements.\17\ The 
subcommittee's new grading criteria also come closer to the 
executive branch Management Scorecard, which sets more 
demanding standards for financial management success.
---------------------------------------------------------------------------
    \17\ Indeed, an unqualified audit opinion may actually be a 
misleading indicator that masks weaknesses in an agency's financial 
management systems. Many Federal agencies achieve ``unqualified'' 
opinions only through time-consuming and costly manual efforts that 
work around, rather than rely upon, the agency's systems.
---------------------------------------------------------------------------
    The four new grading categories are based on the results of 
a survey that the subcommittee sent to the Inspectors General 
of the 24 agencies. The categories are as follows:
 Whether this year's financial statements were 
prepared from data produced routinely by the agency's financial 
management systems;
 Whether the agency's financial and performance 
management systems were integrated;
 Whether the agency's financial systems contained 
complete and reliable data on the costs of its programs and 
activities;
 Whether the agency's financial systems provided 
timely, accurate and useful data to support day-to-day 
management and policymaking.
    The possible responses to each of the four categories were 
``entirely,'' ``for the most part,'' and ``to a limited extent 
or not at all.'' Agencies received 4 points for a response of 
``entirely;'' 2 points for the response of ``for the most 
part;'' and 0 points for ``to a limited extent or not all.''
    This year, the subcommittee gave equal weight to the three 
categories used in prior years and the four new categories. 
Thus, agency grades are based on the total points assigned for 
each category divided by seven.\18\
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    \18\ In addition to the four questions described above, the 
subcommittee also asked the Inspectors General whether their agencies 
had violated the Anti-deficiency Act (i.e., overspent their 
appropriation accounts) for fiscal year 2001. The responses to this 
question were not factored into the grades since only two agencies--the 
Departments of Defense and Agriculture--had actual or potential 
violations, and they both received failing grades irrespective of these 
violations.
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    The subcommittee believes that the revised grading criteria 
provide a more accurate measure of financial management 
successes than the former criteria. At the same time, the 
subcommittee regards the new criteria only as a starting point 
toward defining a truly successful financial management 
program.
                    Appendix C.--Index of Witnesses

    ALDERMAN, Karen C., executive director, Joint Financial 
Management Improvement Program, June 6, 2002.
    BLANCHARD, Lloyd A., Ph.D., Chief Operating Officer, Small 
Business Administration, June 6, 2002.
    BRACHFIELD, Paul, Inspector General, National Archives and 
Records Administration, May 14, 2002.
    BLOOM, Thomas R., Director, Defense Finance and Accounting 
Service, Department of Defense, March 20, 2002.
    CALBOM, Linda M., Director, Financial Management and 
Assurance, U.S. General Accounting Office, June 13, 2002.
    CARTER, Thomas A., Assistant Inspector General for Audit 
Services, Department of Education, June 26, 2002.
    DOONE, Alison L., deputy staff director for management, 
Federal Election Commission, May 14, 2002.
    ENGEL, Gary T., Director, Financial Management and 
Assurance, U.S. General Accounting Office, May 14, 2002.
    EVERSON, Mark W., Controller, Office of Federal Financial 
Management, Office of Management and Budget, April 9, 2002, and 
June 26, 2002.
    JONAS, Tina W., Deputy Under Secretary for Defense, 
Financial Management, Department of Defense, March 20, 2002.
    HAMMOND, Donald V., Fiscal Assistant Secretary, Department 
of the Treasury, April 9, 2002.
    HANSON, Elizabeth A., Director, Departmental Real Estate 
Assessment Center, Dept. of Housing and Urban Development, June 
26, 2002.
    HINTON, Russell W., chair, Single Audit Committee, National 
Association of State Auditors, Controllers and Treasurers, June 
26, 2002.
    HITE, Randolph C., Director, Information Technology 
Systems, U.S. General Accounting Office, March 20, 2002.
    KNICKERBOCKER, Frederick T., Associate Director for 
Economic Programs, U.S. Census Bureau, June 26, 2002.
    KUTZ, Gregory D., Director, Financial Management and 
Assurance, U.S. General Accounting Office, March 20, 2002.
    LAMOREAUX, Alan J., Assistant Inspector General for Audits, 
National Aeronautics and Space Administration, March 20, 2002.
    LI, Allen, Director, Acquisition and Sourcing Management, 
U.S. General Accounting Office, March 20, 2002.
    LIEBERMAN, Robert J., Deputy Inspector General, Department 
of Defense, March 20, 2002.
    MADDOX, Charles C., IG, District of Columbia, District of 
Columbia Medicaid Fraud Control Unit, June 13, 2002.
    MANGANO, Michael F., Principal Deputy Inspector General, 
OIG, Department of Health and Human Services, June 13, 2002.
    MARTIN, Jack, Chief Financial Officer, Department of 
Education, June 26, 2002.
    MCLEAN, Donna R., Assistant Secretary for Budget and 
Programs and Chief Financial Officer, DOT, June 6, 2002.
    MCNAMEE, Patrick L., partner, PricewaterhouseCoopers LLP, 
March 20, 2002.
    PASTOREK, Paul G., General Counsel, National Aeronautics 
and Space Administration, March 20, 2002.
    RITCHIE, De W., Jr. Acting Deputy Chief Financial Officer 
Department of Defense, March 20, 2002.
    REGER, Mark A., Chief Financial Officer, Federal 
Communications Commission, May 14, 2002.
    ROCKE, Sidney, director, District of Columbia Medicaid 
Fraud Control Unit, June 13, 2002.
    THOMPSON, Sally E., Director, Financial Management and 
Assurance, U.S. General Accounting Office, June 6, 2002, and 
June 26, 2002.
    TOOMEY, Hon. Patrick J. (R-PA), U.S. House of 
Representatives, May 14, 2002.
    SMITH, Dennis, director, Centers for Medicaid and State 
Operations, June 13, 2002.
    VARHOLY, Stephen J., Deputy Chief Financial Officer, 
National Aeronautics and Space Administration, March 20, 2002.
    WALKER, David M., Comptroller General of the United States, 
U.S. General Accounting Office, April 9, 2002.
    WARREN, David R., Director, Defense Capabilities and 
Management, U.S. General Accounting Office, March 20, 2002.
    ZIRKEL, Frederick J., Inspector General, Federal Trade 
Commission, May 14, 2002.

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